Peru, Colombia, and Chile merge stock markets

Peru, Colombia, and Chile will formally merge their stock markets Monday, creating the second-largest bourse in Latin America after Brazil and promising to increase liquidity in the mineral-rich Andean region.

The market alliance of the three right-leaning nations spanning most of South America's Pacific coast gives investors better exposure to assets linked to the region’s natural resources and its rising middle class. And coupled with their recently announced plans with Mexico to form an economic bloc called the Area of In-depth Integration, the stock market merger creates a political foil to the Bolivarian Alliance of regional leftist governments led by Venezuelan President Hugo Chávez.

“There's a clear difference in policy organization in this group of countries,” says economic analyst Sebastian Guevara of Apoyo Consultaría, a Lima-based research company. “There's a conscious effort to encourage integration between these like-minded countries.”

Special significance for Peru

The launch of the regional bourse, dubbed the Mercado Integrado Latino Americano (MILA), has special significance here in Peru, coming days ahead of a presidential run-off that pits right-leaning Keiko Fujimori against left-leaning Ollanta Humala, who has in the past campaigned with Mr. Chávez.

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Although the Lima stock exchange represents the smallest share of MILA, this nation has the potential to dictate its success in the coming months.

Victory for Mr. Humala in the election “could pose obstacles to the merger of the [stock] exchanges,” says Mr. Guevara, adding that the former Army captain has shown hostility toward foreign investors and proposed government controls over corporate mergers.

Concerns about Peru's vote

Indeed, the Lima stock exchange plunged in April when Humala won the first round of voting, but it soared May 26 when Lima-based polling firm Datum showed Ms. Fujimori now leading with 52.9 percent support.

The daughter of imprisoned former President Alberto Fujimori is backed by much of the business community, recently gaining a big endorsement from third-place presidential candidate and former Finance Minister Pedro Pablo Kuczynski.

Her steady rise in the polls in part reflects the nation's desire to see a continuation of the prudent fiscal policies and pro-market initiatives – such as the launch of the MILA – that helped fuel 8.8 percent economic growth in 2010, the highest in a region of hot economies.

Aldo Defilippi, executive director of the American Chamber of Commerce of Peru, which represents 580 local and international companies with interests here, says he has received a number of calls from investors concerned about the election.

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“In general terms, the companies don't have a preference for one candidate but a preference for what each candidate should do,” he says. Both candidates have tacked toward the political center, he says, and both have the capability of continuing the macroeconomic policies of the previous two administrations.

This should include supporting MILA, says Mr. Defilippi, which will give Peruvian companies a new way to raise capital by allowing Chilean and Colombian brokers to invest directly in the Lima stock exchange, and vice-versa, eliminating fees and hoops.

Mining companies dominate all three bourses, accounting for 60 percent of the Lima stock exchange alone, according to analyst Hector Collantes of Apoyo.

“The MILA brings closer to the market the opportunity to gain exposure to Peruvian consumption investment vehicles via those companies listed in Bogotá and Santiago,” says Mr. Collantes. “[M]ore investors and investment options might increase overall liquidity.”

On the MILA, the Lima exchange is the largest by number yet the smallest by market capitalization, with $83 billion spread over 248 companies at the end of April, according to the World Federation of Exchanges. The Santiago stock exchange had $343 billion among 230 companies at the end of April while the Colombia exchange had $217 billion among 83 companies.

What will MILA's future be?

If Mexico's $473 billion bourse were to join, MILA would exceed the Brazilian bourse's $1.6 trillion market capitalization. Yet another future, say analysts, could be Brazil purchasing MILA and wrapping it into the Bolsa de Valores de São Paulo (Bovespa).

Guevera agrees MILA will provide more investment opportunities in Peru, but the fact remains that the Lima stock exchange is tiny, seeing a daily trade volume of $30 to $40 million.

The Lima exchange hopes trading volume to grow 20 to 25 percent as a result of the merger. “There is a lot of interest from Chilean and Colombian investors to acquire mining and junior mining stocks listed on the Lima exchange. This will allow an increase in liquidity,” the press office wrote in an email to the Monitor.

With Peru's government in flux, Guevara says the economy here has greater immediate concerns than the launch of MILA.

“Peru has been on the market friendly side for the past 10 years, but there could be an adjustment," he says. "I think there is a lot of uncertainty.”